United States: Electric Utility Securitizations—Plant Closings

Given the significant number of nuclear plants (approaching 20) and coal-fired plants (approaching 400) that have been recently closed or designated for closing, or are at risk of closing, utilities not already considering utility securitization (enabled through state legislation, with such legislation already existing in approximately 20 states) may want to consider this financing option as a means to recover approved costs related to such plant closings. Plant closings can significantly benefit utilities (and their customers) in situations where investment costs that are needed to comply with environmental regulations or to repair a plant or unit are considerably higher than the costs related to the closing of the plant or unit.

The following represent two recent utility securitizations related to plant closings:

  • Consumers Energy Company (Michigan) Coal-Fired and Gas-Fueled Units (2014)—This Michigan utility was authorized to recover through a utility securitization the remaining or unrecovered book value (determined to be a regulatory asset and qualified cost for purposes of the Michigan utility securitization statute) of seven coal-fired and three gas-fueled electric generating units designated for early retirement due to changes in environmental regulations. The financing order approved the issuance of approximately $390 million of bonds.
  • Duke Energy Florida (Florida) Nuclear Plant (securitization expected to close in 2016)—This Florida utility was authorized to recover through a utility securitization costs related to the premature closing of the Crystal River nuclear plant. In light of damage to the nuclear plant in 2009, and the considerable costs that would be required to repair the plant, the plant was permanently shut down in 2013. The financing order approved the issuance of approximately $1,313 million of bonds.

An important requirement of utility securitizations that the applicant demonstrate that the securitization has a significant likelihood of resulting in lower overall costs or would avoid, or significantly mitigate, rate impacts compared to the traditional method of cost recovery. The Michigan Public Service Commission financing order found that the net present value of the revenues to be collected under the financing order would be less than the amount that would be recovered over the remaining life of the qualified costs using conventional financing methods (with Consumers Energy's assertion of an approximate $135 million difference reduced by $35 million pursuant to the financing order). The Florida Public Service Commission financing order found that the traditional method of recovering the costs (i.e., implementation of a base rate increase) would result in a total revenue requirement over the 20-year recovery period of approximately $2,531 million, while, with the issuance of bonds, the estimated cumulative revenue requirement over the total period outstanding would be $1,823 million, which is $708 million lower than the estimated cumulative revenue requirement under the traditional recovery method. Two additional important factors support these findings: utility securitizations provide for the spreading of costs over the term of the bonds and, due to the AAA rating of the bonds issued in these securitizations, a significant reduction to a utility's cost of capital.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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